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Valuations may offset Q4 show, growth outlook for Divi's Laboratories

The company delivered a strong revenue and operating performance in the March quarter

Drugs medicine

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Shivam Tyagi

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Divi’s Laboratories, the country’s second-largest pharma company by market capitalisation, saw its stock rise 5.7 per cent to hit two-year high of Rs 4,359 apiece on the BSE in Monday’s intraday trade. This followed the active pharmaceutical ingredient (API) manufacturer's strong earnings print in Q4FY24. The pharma firm's stock ended the day with gains of 3.2 per cent at Rs 4,222 a share.
While analysts are positive about the company’s performance and its FY25 commentary, they feel the stock price may see some downsides amid rich valuation.
The March quarter of FY24 saw the company's net profit rise 67 per cent to Rs 538 crore compared to Rs 321 crore in the corresponding period last year. Its revenue grew 18 per cent to Rs 2,303 crore from Rs 1,951 crore in the same period a year ago.
Earnings before interest, tax, depreciation, and amortisation (Ebitda) were higher at Rs 731 crore compared to Rs 473 crore in the corresponding period last year, up 58 per cent. Ebitda margin for the quarter expanded to 31.7 per cent — 670 basis points higher year-on-year (YoY).
Analysts such as Motilal Oswal Research said the strong earnings that beat estimates in Q4FY24 were fuelled by a revival in the custom synthesis (CS) business. Higher sales growth drove better profitability for the quarter, it added.


Tushar Manudhane and Akash Manish Dobhada of the brokerage raised their earnings estimates by 3 per cent each for FY25 and FY26, factoring in a better demand outlook in the contract development and manufacturing organisation (CDMO) segment, the addition of new technologies (which will enhance the scope of contracts from innovators), and a higher number of product offerings in the generics segment.

Analysts at Nuvama Research also echoed the sentiment on Q4 performance and the CS business leading to a better product mix. It factored in a 16 per cent and 26 per cent revenue and Ebitda compounded annual growth rate, respectively, over FY24–26.
But, the brokerage said there was a downside in the stock price amid rich valuation.
It expects double-digit growth driven by gains in emerging generic APIs and its volumes, expansion in CDMO business, and the launch of two new projects. However, most of this growth is factored in the stock price, it said. “The stock is trading at a rich 43 times FY26 earnings," and the brokerage has retained a reduce rating with a revised target price of Rs 3,660.
Analysts at Kotak Institutional Equities also remained optimistic and forecasted an annual sales growth of 23 per cent in custom synthesis and manufacturing over FY24-27, capturing an upside from Glucagon-like Peptide or GLP-1 (used to treat diabetes), contrast media, and other projects.
However, analysts said that a risk of the pricing recovery in generic APIs being delayed remained, compared with their estimate of a revival in early FY25. On these elevated estimates, valuations were likely to stay rich. The brokerage retained a sell rating with a fair value of Rs 3,250.
Vishal Manchanda and Rushank Mody of Systematix Research expected the company to grow its revenues by 13 per cent annually over FY24-26. This is on the back of a double-digit growth led by new custom synthesis opportunity, and entry into new molecules in the generics segment (led by upcoming patent expiries). The brokerage retained its sell rating and has a price target of Rs 2,643 based on 30 times FY26 price to earnings.

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First Published: May 27 2024 | 9:16 PM IST

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